Blogs of People We Know

Other Conservative Blogs

Minnesota Organization of Blogs

Buttons

Wednesday, January 04, 2006

Dahlberg and Kaardal on Modern Economics

The Honorable Tom Dahlberg and I have been working on a contribution to neoclassical economic theory of labor supply. We think neoclassical economics would be more fruitful in its application to the modern economy if it gave the uniqueness of human capital its proper place.

Here is our pitch to the economists, “Uniqueness of human capital is now much more important in the new economy than we originally thought.” Here it is:

(1) In the new technology-driven economy, all capital, including human capital, is a commodity.(2) However human capital – unlike virtually all other capital --because of its uniqueness (this proposition if not falsifiable at least can be shown to be true by a preponderance of the evidence) offers opportunities for rent seeking to a vast number of workers.(3) Firms operate to maximize profits. Workers maximize utility.

So, really what we’re proposing is a new perspective on the neoclassical labor supply curve. The economy should be understood in part through the uniqueness of each worker because that uniqueness forms their rent seeking behavior which in turn leads to the formation of firms and the establishment of an economy.

I hate to say it, but there is really nothing new here. It is true that most models of labor supply assume, for the sake of simplicity, that either all labor is identical, or that having a higher amount of human capital simply makes you, in a sense, "bigger" than those with less. (ie: a more educated worker simply has more units of "effective labor" to provide to the market than a less educated worker, and the market trades in units of effective labor.)

Messrs. Kaardal and Dahlberg are proposing that each laborer is instead a monopolist in the provision of a particular type of labor service (his own) and that each type of labor is an imperfect substitute for each other type. This is called "monopolistic competition." This assumption has been studied. The Dixit-Stiglitz model is the most common modern form.

Now I most go off and finish my reconciliation of quantum mechanics with Einstien's treatment of gravity.